Return of the Fed's Punchbowl ** Infrastructure for a Stronger US ** SE Asia Recovery Risk ** Sectoral Credit Heatmap ** 2020 Ratings Performance

We have a full house for S&P Global Essential Economics this week: Three articles on economics and two on credit! Here we’ll share our views on the following: The risks of higher inflation and rates versus leaving rates too low for too long; Why infrastructure is the ticket to a stronger US economy; The risks to SE Asia recovery from stubbornly high COVID cases; The huge variations in the pace of sectoral recoveries; and a ratings performance review for 2020. 

Return of the Punchbowl 

I believe the rising debate around fiscal stimulus, inflation pressures, the Fed’s response, and the shape of the recovery is very timely but needs to be broader. Recent “go big” fiscal stimulus proposals by the Biden Administration have rightly raised concerns about overheating the economy and stoking inflation. This could bring the Fed back into play to take away the punchbowl (remember that?). Conversely, there’s a fear of generating any above-target inflation, which will keep fiscal policy too cautious, demand too weak and prolong the low rates era supportive of high asset prices and the search for yield.  

What’s needed is a more complete and balanced discussion of the risks around too high inflation (expectations) versus the ongoing macro-credit risks from too low inflation. 

To read my full blog, click here. 

Infrastructure the Ticket to a Stronger US Economy 

Chief U.S economist Beth Ann Bovino argues that infrastructure may have the greatest potential for expansive, bipartisan investment in the US, and that it’s also where we see typically the greatest bang for the federal buck (through fiscal multipliers). Pre-election, then-candidate Biden laid out a plan to pump $2 trillion into roads, bridges, water systems, electricity grids, and universal broadband, among other services. Given that interest rates at near historic lows, materials remain affordable and high unemployment persists, it’s difficult to see an economic reason not to act.  If done wisely, infrastructure investment can help get the US get back on track by boosting the economy, creating lasting middle-class jobs and growing GDP. 

To read Beth Ann’s Op-Ed, click here.  

Recovery Delay Risks on the Rise in SE Asia 

Southeast Asia has been struggling with sporadic outbreaks of COVID-19. The region’s major countries --Indonesia, Malaysia, the Philippines, and Thailand--are living with the effects of new waves that only recently look to have peaked, which threatens to delay recoveries. For example, a two-month delay would reduce our Southeast Asia GDP growth estimate by 1 percentage point in 2021, to 5.2%.  

Our baseline estimates still assume emerging Southeast Asia will return to its pre-pandemic level of GDP around August 2021. However, delay risks are rising, and a prolonged trajectory would drag on the region's growth rate and lead to higher permanent economic costs. 

To read Vishrut’s full article, click here. 

Sectoral Credit Heatmap: Some Bright Spots in the Recovery from COVID-19 

Analyst Jeanne Shoesmith notes that our sectoral recovery expectations are stabilizing.  

Consistent with our previous expectations, there is tremendous variance of recovery prospects across different corporate sectors. We still believe it will take until well into 2022 or, in some cases, 2023 and beyond for many sectors to recover to 2019 credit metrics. Leisure and travel, especially those focused on more profitable business and international travel, remain under pressure. 

Recovery expectations remain fluid and will rely on companies' ability to adapt to the inevitable post-pandemic changes in consumption patterns and to adhere to more conservative financial policies to reduce elevated debt loads in harder hit sectors. 

To read Jeanne’s full report, click here. 

Review of 2020 Ratings Performance 

Our corporate ratings performed as designed last year during the COVID-led downturn as the number of rated corporate defaults reached its highest level since 2009. Specifically, the number of defaults rose in 2020, but all entities that defaulted began the year rated speculative grade, with 94% carrying a rating in the 'B' category or lower. Default and downgrade rates were in line with the rank ordering of our ratings, with higher default and downgrade rates among the lowest ratings. 

Bottom line: Amid the challenging circumstances of a pandemic-led severe global downturn, our ratings in 2020 showed their value as indicators of creditworthiness and relative default risk. 

To read Nick’s full report, click here.